"Through
the storm we reach the shore,
You give it all but I want more,
And I'm waiting for you "–
U2, With Or Without
You

If
one assumes that people learn effectively and etch
things in their long term memory through repetition,
then I will be forgiven for hammering a couple of points
home that I have referred to a few times before. I think
it warrants an entire column to really help you
understand what we, as venture capitalists going through
hundreds of business plans, are seeing in Vancouver and
how we can make things better. This is important stuff,
people, so listen up.

We
have two problems that need fixing in our BC technology
entrepreneurial ranks: 1) we need entrepreneurs/founders
of tech companies with years of explicit customer
knowledge only gained from working at or with global
companies and 2) we need every entrepreneur/founder to
understand the game of financing of early stage
companies.

For
the sake of argument, I am talking here about start-up
companies that want to be billion dollar public
companies some day or be bought for hundreds of millions
along the way. Big ideas.

Let's
start with the management issue. It's now a VC cliché
to say "the three most important things in a
start-up are management, management, management."
When asked about the number one issue holding back BC's
technology industry, every VC in town will tell you,
"inexperienced senior management". We have now
created an inferiority complex among the ranks of the
technologists and businesspeople involved in the
industry. I'm not going to disagree completely with the
generalizations about senior management. What I will do
is get more specific because, in fact, we have seasoned
start-up people that understand the chaos and
uncertainty in growing early stage companies. We also
have senior managers that are smart and savvy in
business that can effectively manage a growing
operation. What we are missing is explicit domain
knowledge about the markets that the start-up is headed
towards. Far too often we see start-ups with a great
idea but a CEO that knows very little about the market
and the customers.

Nothing
is guaranteed in starting a company. The most well-known
entrepreneurs in town, having successfully created their
companies and generated huge value in the process,
cannot step up to the plate with a new start-up and be
guaranteed success again. There are just too many
variables to control. But the biggest, largest, most
accurate factor in predicting a successful outcome is
this: How well the entrepreneurs and founders know their
potential customer base. Put it another way. What I am
saying is that any of the successful founders of
companies like Pivotal, HotHaus, Creo etc. have as much
a chance of repeating their success from the start, as
someone that has worked for many years in a senior
product marketing, or engineering role in a big/rapidly
growing tech company. I'm talking about anyone that
knows the market, the conditions of it, the competition
in it and the dynamics of it and has built successful
products selling in that market. Typically these people
also have great contacts into decision-making positions
at many of the potential customers for the new venture.
These are the specific qualities that make a "best
bet" for starting a world-beating company.

Look
at some recent successes locally for some examples of
which I speak:

· Abatis Systems - founded by two guys with years of
senior experience at Newbridge working with ATM and IP.
Result: Celtic House lathered them with VC money and
they built a product that the biggest carriers and CLECs
wanted. The big carrier contacts? Theirs and the senior
management and VCs that they brought on board after the
successful launch of the company.

· Inkra Networks - founded by one product marketing
person from Nortel, another senior engineer from
Motorola Wireless Data and a third, an entrepreneur who
sold his last company to a large network access
equipment company. Result: Vancouver and Silicon Valley
VCs pour money into the company and it is able to set up
a customer advisory board of CTOs and CEOs of its target
market companies through the relationships and contacts
of the founders and the VCs. This is before they even
have an alpha product.

In
Ottawa, this phenomenon is endemic. All of the
well-funded start-ups in the last two years have begun
with senior, experienced managers and executives from
Nortel, Newbridge, Mitel, MOSAID and JDS Uniphase. They
are world-class start-ups, attracting foreign capital as
well as Canadian VC money. They are building products
that the customers have identified as "need to
have" or "must have". Why? Because they
knew these customers inside out and could see, very
clearly, where the market was headed.

So
it should come to no surprise to you that the Silicon
Valley has known this little secret, has had this
immense edge because of its world-class technology
company density and has become the mecca of technology.
The average business plan arriving on the desk of the
top performing VC funds in the Valley have founders or
early stage executive with resumes that say years of
experience at Intel, HP, Sun, Cisco, Oracle, etc. etc.
When these entrepreneurs make their presentations to VCs
for money, they confidently explain exactly what they
are building, why the biggest customers in the world
will buy it, how they will sell it to them and who they
know that can help them get it done.

Remember
my caveat. The best laid plans inevitably go awry due to
all of the variables at play. Look at Pivotal and Creo
as examples of local companies that started out in
completely different markets than they are currently in,
stumbled badly, almost ran out of money, came up with a
new idea for a new market and became successful. That
was due to the brilliance of the founders at a)
recognizing the mistake b) hiring new management with
the explicit domain knowledge for the new market and c)
executing the new plan. In other words, explicit
customer and market knowledge doesn't guarantee success.
But it sure will get you the credibility, which leads to
financing to allow you to try.

Vancouver
is very, very close to the critical mass of large
companies with experienced people that will start the
next big companies. As VCs we don't see as many
start-ups with superstar credentials as Ottawa or the
Silicon Valley. But it is starting to happen. I am quite
optimistic about the future talent base. If you are
looking to start something big, have this experience on
the team with you.

Moving
on to bone of contention number 2. If I told you that
there was a company that had a world-class team with
deep customer knowledge and experience in building
globally successful products existing today and then I
said that no VC anywhere has funded them yet, you would
be puzzled, non? You would say, "Brent, I thought
you just said that if they had the goods, the VCs would
love to support them." Alas, this mystery company,
which does in fact want VC, never understood the early
stage financing game and it may cost them a considerable
amount of value.

If
your intention is to be a world-class company, then you
have to set yourself up from the very beginning to be
one. There can be no funny deals. And this is a town
renowned for "funny" deals. Plain vanilla
equity structures need to be in place by going to a
lawyer and an accountant from day one that has done
venture-backed companies before. Like any other service
or product, you get what you pay for. If you get Al's
Accounting and your mother's friend's divorce lawyer to
set up your initial company structure, you are done.
Dinner. Top firms in town know what to do. Even better,
they know the VCs and many angels and can get you the
introductions.

If
you have an idea and want to leave your company to try
it out, but you have never started a company before,
your first instinct will be to ask your friends and
family for advice. And advice from one source always
needs to be validated by who it is and what they have
done. This may seem rather obvious, but if you are
getting advice on how to start your technology company
from a mining, forestry or retail executive, you are
getting nearly useless information. Sure, they are
successful businesspeople. They have networks. They know
good people. But the person you need to talk to is in
the technology industry. No one in mining knows how to
finance a technology company. And if you ever think that
a VC, from here or the US, is in your plans for
financing, you need to avoid taking the
"funny" deal for debt or equity or large fees
or promises. Those deals will be possible deal killers
for any institutional source of money. This happens WAY
too often around here.

Here's
a brief primer on what NOT to do when setting up
your company:

· Take money without a shareholder's agreement and a
subscription agreement (Investment agreement) defining
responsibilities and representations on both parties. A
hand-scrawled one page deal will be a deal killer from
institutional investors later.
· Take on 20 or more investors who each give you small
amounts of money (too hard to manage down the road when
you need investor approvals, etc.)
· Do a deal that says that the investor gets their
money back and gets a significant chunk of equity. That
is complete crap. Equity investors only get their money
back when the shares are sold. I have seen these deals
done many times before and it stinks. It means that the
investor has their cake and gets to eat it too. It's
either debt for no equity (or a very small amount of
warrants) or equity, not both.
· Put four founders and your lawyer on the board of
directors and no one from outside the company from the
tech industry. A board needs to be objective and create
accountability, not be an excuse for a management
meeting.
· Issue stock options or warrants or founder's shares
to every Tom, Dick and Harry that gave you advice early
on. If they are no longer helping the company on an
active basis, then you would find it hard to justify to
the employee working their skin to the bone that they
get less options that vest over 4 years than the
"advisor" that helped your company for all of
30 minutes over a coffee at Starbucks.
· Do a complicated deal period. Plain vanilla. Common
Stock for money. When you are a very early stage
company, fresh out of the gate, don't create
"hair" that later investors will get queasy
about.

A
sign of maturity of a technology cluster is the
sophistication of the entrepreneurs and the
infrastructure. Vancouver does not lack for exciting
technologies or interesting opportunities. It is often
hurt by plain bad advice and judgment. Everyone, and I
mean everyone, that works or supports the industry here
needs to constantly look to how things get done
efficiently elsewhere and strive to adopt the formulas
that work by learning and listening. There is a machine
for financing companies that works in the major US tech
centers and very recently in Ottawa. There is an
understanding between financier and entrepreneur about
the process of making a deal that has been learned by
trial and error. And VC is the financing path for growth
in nearly every single technology company in the US. The
system works. Well. We need to listen and learn.

We
will get there, Vancouver. We have the experienced
people with deep customer knowledge percolating in our
major tech companies. We have more and more people
learning the financing game. For me, it can't happen
fast enough.

Random
Thoughts –

- So Long And Thanks For All The Laughs - A few
people (OK, very few... and my mother doesn't count)
have asked where I derived my writing style. I would
have to say that Stephen King inspired me to use music
lyrics in a kind of pop culture meets dry written
material fusion thing. And Rick Reilly of Sports
Illustrated is easily the best improvisational metaphor
writer ever born (To wit: from a column he wrote
deriding Canada after the US anthem was booed at
Vancouver and Edmonton NHL games - "You've only got
six teams left out of the 30 in the league, and those
six are lookin' paler than a Saskatoon stripper. None of
'em have a snowball's chance this year, and most are
broker than Braniff.") Where does he come up with
these lines?

So
it is with a heavy heart, that I acknowledge my third
writing inspiration upon his untimely death. Douglas
Adams passed away in Santa Barbara, California two weeks
ago at age 49, leaving us without the funniest science
fiction writer ever known. He is most famous for his
trilogy of four books based on the Hitch Hiker's Guide
To The Galaxy, which was originally a radio script for
the BBC. Each of his sidesplittingly funny books was
about 40 pages of plot and 260 pages of tangents that
left you laughing out loud in public. He was a true
genius of creativity and wit. And I devoured everything
he wrote and everything he produced including a fabulous
"Myst" like video game called Starship
Titanic, which I'm sure only sold well in England and
parts of Canada where we "get" his type of
humour.

His
legacy lives on with a website, funded and run by the
BBC, at http://www.h2g2.com
This is the true Hitchhiker's Guide that was his
original vision. It is researched by anyone that wants
to add their story of their corner of the universe.
Another reason I liked Douglas and take inspiration from
his writing is summed up in this quote from him: "I
love deadlines. I love the whooshing noise they make as
they go by."

-
Glenayre is Gone - thirty-five years ago, a few
guys from Coquitlam started a pioneering company in our
industry in BC. They named the company after a street
that one of them lived on. This company went on to
become a large player in the wireless messaging industry
before wireless was an industry. In the mid-90's all of
the management disappeared to North Carolina as a larger
company bought them, but kept the Glenayre name. Some
250 people continued to work for Glenayre here in
Vancouver until yesterday. In a major restructuring, the
company pulled out of its pager business altogether.
This product line, which competed with the RIM
Blackberry, got absolutely smoked in the market by RIM
and Motorola and sales were 70% less than expected.
While it is sad to lose a pioneer, the good news is that
there are some very talented people looking for a home
in our wireless industry now.

Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).